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Intelligent Investor US Edition February 7 2011
Intelligent Investor US Edition February 7 2011
U.S.
The Economic Monitor Series. Free Edition.
Stock recommendations and price targets from top The Dow advanced to their highest levels since June 2008 on
Monday as a flurry of merger news and solid earnings sparked
brokerage firms broad gains. The DJIA closed at 12,161.63, up by 69.48 points, or
0.57 percent.
Analysis and views on Plane Truth: Boeing 737
Conundrum - Airline' Perspective Benchmark 10-year notes fell 9/32 in price for a 3.68 percent yield,
hovering at its highest since May, up from 3.64 percent at Friday's
Economic Indicator Watch close.
The euro briefly erased its losses against the dollar, helped by
Important Events Scheduled on 08 February. gains in U.S. stocks and easing concerns about the euro zone debt
crisis. The euro climbed as high as $1.3590, before retreating to
Economic Events $1.3580, slightly down on the day.
Corporate Events
STOCK INDICES
Entergy, Sara Lee, Walt Disney Company and
McAfee are some of the S&P 500 companies INDEX LAST CHNG % CHNG
reporting quarterly results DJIA* 12161.63 69.48 0.57
AOL to buy The Huffington Post DJ Total Stock Market* 13914.41 96.11 0.7
FUTURES
LAST CHANGE
KBW
BofA Merrill
Broadcom Reinstates with buy rating and $53 price target Buy
Susquehanna
Disclaimer: The views and investment tips expressed by investment experts are their own, and not that of IBTimes or its management. We advise users to check with certified experts before
taking any investment decisions.
The International Council of Shopping Centers and Goldman Sachs will release data on chain store sales for week ended 04-Feb at
0745 EST.
ICSC Research had cut its January forecast for industry sales growth to 1.5 to 2.0 percent because of bad weather that month.
It measures nominal same-store sales, excluding restaurant and vehicle demand, and represents about 75 retail chain stores.
Redbook Research will release data on chain store sales at 0855 EST.
The Johnson Redbook Retail Sales Index is a sales-weighted index of year-over-year same-store sales growth in a sample of large U.S.
general merchandise retailers representing about 9,000 stores.
Investor's Business Daily and TechnoMetrica will release data on consumer optimism for the month of February at 0830 EST
"Our key takeaways are a replacement aircraft is preferable to re-engining; Boeing’s key 737 customers are unlikely to 'defect' to Airbus; and the
majority of Boeing’s customers are extremely satisfied with the performance of the 737NG, with some remarking 'if it’s not broken, don’t fix it'," said
Robert Stallard, an analyst at RBC Capital Markets.
RBC Capital said its findings suggest that Boeing won’t launch a re-engined 737 plane, and will likely push for a new narrowbody plane targeting the
180-200 seat market, with entry into service by 2020.
"Although Boeing may sacrifice some near term market share loss to Airbus, we believe by exercising patience, they will maximize market share in
the long run. We remain positive on commercial aerospace, with Precision Castparts Corp. (PCP) and BE Aerospace Inc. (BEAV) as our Top Picks," said
Stallard.
Stallard said more than half of the 737 customers favor waiting for a next generation narrow body solution from Boeing, rather than re-engining for
several reasons. Customers want a step function increase in unit cost savings, unwilling to compromise for a paltry 2 percent to 4 percent savings
from a re-engined aircraft.
Moreover, many of Boeing’s 737NG customers are either low cost carriers that demand fleet simplicity, or carriers such as AMR that are using the
737-800 for replacement purposes, RBC Capital Markets said in a note to clients.
Stallard said leading Boeing customers suggest they’re very happy with the dispatch reliability and cost performance of the 737NG; 737NG is slightly
cheaper to operate than the A320 family, and the proposed A320 NEO only offers 2 percent to 4 percent unit cost advantage; and Most Boeing
customers want fleet simplicity or are concerned about residual values.
Stallard said perhaps full service carriers that operate mixed fleets may prefer a new plane type such as the NEO or CSeries, especially those that are
considering large scale replacement orders. Although Airbus is making good progress on the NEO, booking potentially 500-600 new orders by the
Paris Airshow in late June, Stallard thinks quintessential 737NG operators will not be defecting.
As most airline customers are in no rush to commit to a new fleet type for either replacement or capacity growth, Stallard think Boeing has plenty of
time to introduce a replacement narrowbody aircraft.
"Based on our airline conversations, we estimate that top 25 customers make up roughly 70 percent of Boeing's 737 production in 2011. And they
have reserved close to 40 percent of the expected production in 2015 and about 30 percent of that in 2016 skyline. Only six or so airlines, of which
three have Boeing only narrowbody fleets, still need to firm up delivery positions in the 2013-15 time frame," said Stallard.
Given the relatively long delivery skyline already in place, Stallard thinks airlines will wait for the OEs to flush out their designs and unit cost
advantages before making decisions on the next leg of narrowbody requirements beyond 2015.
Airbus confirmed in December 2010 that it is going to re-engine its best selling A320 family narrowbody aircraft, with the new CFM Leap X and Pratt
& Whitney PW1100G (aka GTF) engines being used to power the aircraft.
The A320 NEO is planned to be delivered in spring 2016, and Airbus states that the new engine and other improvements, notably wing tip sharklets,
should deliver fuel savings of up to 15 percent, as well as noise, emission and maintenance savings.
The NEO will have over 95 percent airframe commonality with the current A320 family, whilst also offering 500 nautical miles (926 kilometers) more
range and two tonnes more payload. Airbus sees a market potential of 4,000 aircraft for the NEO over the next 15 years.
Given that Airbus has a number of other development programs ongoing at the moment, Stallard is not surprised to the Airbus CEO Tom Enders
comment "Finding the necessary resources for the A320NEO wasn't exactly a walk in the park".
Following the announcement, Airbus signed a Memorandum of Understanding with Indian LCC IndiGo for 180 A320s, including 150 NEOs, and this
was followed by a firm order for 60 A320s, including 30 NEOs, from Virgin America (both these airlines currently operate A320s, and not 737s).
According to the latest Airbus list prices for 2011, it is charging an extra $6.2 million for the re-engined A320 family aircraft versus the current
baseline, though as always these prices will be negotiated on a customer by customer basis.
The Intelligent Investor - U.S.
Whereas the Airbus A320 re-engining appears to be a relatively straight forward engineering project, which should only require some strengthening
of the wing, to re-engine the Boeing 737 is a trickier prospect.
The wing on the 737 is closer to the ground, and to attach the GTF or Leap-X engines with their larger fans would require some extensive rework of
both the wing and the pylons, and potentially the landing gear. If the main gear needs altering as result, this would also probably impact the wing
box -- and at this point Boeing would be looking at redesigning half the aircraft.
Given its experience with the 747-8, which was also supposed to be a simple re-engining, Stallard thinks Boeing is understandably cautious of taking
on unnecessary development risk, particularly as the 737 continues to generate good sales and good operating margins for Boeing.
Boeing's Commercial Aircraft head Jim Albaugh noted back in March 2010 that "One thing I've learned that there's nothing simple about a derivative
airplane. There's certainly nothing simple about a re-engine. If you did a re-engine the pylon would change, the empennage would change, and
you’d have to raise the front gear a little but, drive some different loads into the airplane, drive some different loads into the wing."
Stallard thinks this situation has not changed, and that re-engining the 737 remains a challenging, though not impossible, engineering project.
A big concerns and potential negatives of re-engining is the aircraft financing perspective. An aircraft lessor or bank is probably not going to see the
appeal of buying an aircraft that has a limited production run, as it widely expected that a re-engined plane will be replaced by the next generation
narrowbody in the middle of the next decade.
In aerospace terms, a 9-10 year production run is very short, and this would have negative implications on the residual value model versus aircraft
that have a more normal 20-plus year production run. The other unknown is what the impact of the re-engined plane would be on the residual
values of the existing models.
The vast majority of the fleets that are owned by leasing companies consist of the most popular 737 and A320 models, and the lessors have some
concern about what the impact of the A320 NEO will be to A320 valuations as Stallard gets closer to the entry into service of the re-engined aircraft -
- and the same would go for the 737 if it were re-engined.
What also remains to be seen is the impact that the NEO has on demand for the current A320 family, and whether there is a gap in demand as
customers wait for the re-engined plane to enter service. Although it is not a like for like comparison, the transition that Boeing saw in the 737 as it
moved from one generation to the next was not entirely smooth, though the aircraft differences in these past examples were more extreme than the
A320 versus the A320 NEO.
If Boeing decides to forgo re-engining the 737, and focus on the next generation narrowbody, Stallard thinks this outcome would be largely viewed
as positive for aerospace suppliers.
As it stands today, Boeing and its suppliers are making good, relatively low risk returns on the 737 NG, and with a strong backlog in an improving
order environment, there is an understandable aversion to disrupting this situation. The decision to punt on re-engining would also mean that the
incumbent suppliers on the 737 have a decade or so before they have to re-compete to get on a successor aircraft.
After an increase of 35 percent in 2009, and then 23 percent in 2010, aerospace stocks have had a good run. With an average valuation of 13.8 times
of 2012 price-to-earnings, Stallard thinks much of the optimism on the aerospace upcycle is priced in, and that it will take an improved earnings
outlook to move the stocks higher.
As aftermarket and original equipment manufacturer growth come through this year, Stallard expects to see good operating leverage and upside to
earnings per share, particularly in the second half.
Stallard said he would be making the most of any stock price consolidation in the aerospace sector in the short term to be adding to positions,
particularly in his favored names like Precision Castparts and BE Aerospace.
According to RBC Capital Markets' airline survey, global airline traffic in December 2010 increased 2.3 percent year-over-year, moderating from
increases of 5.0 percent and 7.9 percent in the previous two months, respectively. Traffic growth slowed after a strong summer season that extended
into autumn, largely because of tougher comps. Global capacity in December increased 2.4 percent, also moderating from mid single-digit growth
year over year since May 2010, as comps become more difficult. Similar to November, annual capacity growth was in line with traffic increase in
December, driven by respectable capacity growth in the U.S. and Asia while Europe was relatively flat.
"Global load factors decreased a slight 10 basis point annually in December to 79.2 percent, but decreased 90 basis points sequentially primarily due
to seasonality. Monthly load factors have expanded year over year in the first eleven months of 2010, starting back in January at 77.2 percent. During
the slower winter flying season, a load factor of over 79 percent is still a strong result, in our view," said Stallard.
The Intelligent Investor - U.S.
TOP STORIES
Economic Events
Federal Reserve Bank of Dallas President Richard Fisher speaks on "A Report on the Economy" before the Stemmons
Corridor Business Association Annual Meeting - 1800 GMT
Federal Reserve Bank of Atlanta President Dennis Lockhart speaks before the Calhoun County Chamber of Commerce -
1800 GMT
Company Events
Avon Products will release Q4 results. The street estimates a profit of 67 cent per share, almost flat from 68 cents in the
same quarter last year. Third-quarter net income had improved to $166.7 million or $0.38 per share from $156.2 million or
$0.36 per share in the year-ago quarter.
Analysts expect Coventry Health Care to report a profit of 88 cents per share for the fourth quarter, up from 74 cents in
the year-ago quarter. The company's third-quarter net earnings had more than doubled to $189.95 million or $1.29 per
share from $70.63 million or $0.48 per share in the same quarter last year.
The street expects Walt Disney to announce a profit of 56 cents per share for the first quarter, up from 47 cents in the
corresponding quarter last year. Fourth-quarter net income attributable to the Company declined 7% to $835 million,
from $895 million in the same quarter last year. Earnings per share were $0.43 down 9% from $0.47 in the prior-year
quarter.
Entergy is due to announce its Q4 results. Analysts expect a profit of $1.24 per share, down from $1.75 in the year-ago
period. Company's third-quarter net income was $492.89 million or $2.62 per share, up from $455.17 million or $2.32 per
share in the year-ago quarter.
Fidelity National Information is expected to report a profit of 60 cents per share for the fourth quarter, up from 44 cents
in the fourth quarter last year. Third quarter net income attributable to common shareholders of $83.2 million or $0.36 per
share, compared to $73.4 million or $0.32 per share in last year quarter.
McAfee will announce its Q4 results. It is expected to report a profit of 69 cents per share, versus 64 cents in the same
period last year. For the third quarter company posted GAAP net income of $47 million or $0.30 per share for the third
quarter, up from $37 million or $0.23 per share in the prior year quarter.
Analysts expect NYSE Euronext to report a profit of 43 cents per share for the fourth quarter, down from 58 cents in the
corresponding quarter last year. The company reported third-quarter net income of $128 million or $0.49 per share,
compared to $125 million or $0.48 per share a year ago.
Wall Street expects Pitney Bowes to announce a profit of 61 cents per share for the fourth quarter, compared to 61 cents
reported last year during the same period. For the third quarter, net income attributable to Pitney Bowes was $88.9 million
or $0.43 per share, compared to $103.2 million or $0.50 per share in the same quarter last year.
Sara Lee is expected to report a profit of 25 cents for the second quarter, down from 28 cents in the prior-year quarter.
For the first quarter, it had reported net income attributable to the company of $192 million or $0.29 per share, compared
with $284 million or $0.41 per share last year.